Pay into Pension or pay off debt?

tioram

Hi

I've been considering stopping my pension contributions for about 18 months to clear off my debts and I wonder if it's a sensible thing to consider.

I'm 31, currently paying around £175 per year into a final salary pension scheme to which my employer contributes about £400 or so. My understanding is that it's a good pension scheme but nevertheless, given that I have debts currently costing me around £380 per month (which I can afford), the extra £175 per month towards my debts would save me around 1 year of interest payments.

Do you think I might regret it later in life if I were to stop my pension and put the money towards my debts instead?

Thanks
Paul

dunstonh

You would be robbing peter to pay paul here. What you save now would be lost later and probably at a higher cost.

You dont tell us anything about the final salary scheme. The £400 employer contribution doesnt matter as that doenst mean anything to you. Your gross cost is £175. That means stopping the pension would save you £140pm after tax relief. Actually it will be less than that due to National Insurance. The amound would depend on whether its a contracted out final salary scheme or contracted in. Lets say your immediate saving would be around £125 as a rough guide.

A typical final salary scheme is worth around 15-20% of your salary as far as benefits go. So, how does that figure compare to what you are paying?

Another potential issue is that if you leave the scheme you may not be allowed back in again.

CLAPTON

in 18 months your employer will pay 7,200 into your pension fund and the tax man, even forgetting about NI contribution will pay 630 i.e. a total 7,820

you will have an extra 140 max per month to pay off the debt i.e. 2,520 over the 18 month period

Often pension scheme have other benefit... death in service etc

Unless you are absolutely desperate financially it seems a no brainer really.

If you are really keen to pay off the debt early are there other economies you can make to your lifestyle ... most people can fairly easily reduce spending by 100 or more by careful management and without too much pain.

tioram

Thanks both, that's a big help.

I'm normally quite sensible with my financial decisions but pensions are somewhat of an unknown quantity to me. That certainly cleared things up a little though. Perhaps I'd be better putting my efforts into making more money to get rid of the debts early (Either of you need a web site or a guitar lesson?).

Thanks again,
Paul